*154 Decisions will be entered under Rule 50.
From 1948 to 1951, inclusive, petitioner was engaged in business as a ship chandler. It was a customary practice in the trade for chandlers to pay the officers of ships which they supplied, a commission which normally averaged 5 per cent of the amount of merchandise sold. On his returns for 1948 to 1951, inclusive, petitioner claimed deductions for commission payments which averaged approximately 16, 17, 14, and 9 per cent, respectively, of sales made during such years. Held, commission payments to the officers of ships are an ordinary and necessary business expense of a ship chandler. Held, further, commission payments made by petitioner during the years in issue did not exceed 7 1/2 per cent of sales. Held, further, a part of the deficiencies for each of the years in issue was due to fraud with intent to evade tax; the returns for the years 1948 and 1949 were false and fraudulent with intent to evade tax; and the assessment and collection of deficiencies for 1948 and 1949 are not barred by the statute of limitation. Held, further, petitioner failed to show that the respondent erred in determining additions to tax*155 for substantial underestimate of estimated tax.
*693 This proceeding involves the following deficiencies in income tax and additions thereto:
| Additions to tax | ||||
| Docket No. | Year | Income tax | ||
| deficiency | ||||
| Sec. 293 (b) | Sec. 294 (d) (2) | |||
| 53008 | 1948 | $ 41,806.06 | $ 20,903.03 | $ 2,701.59 |
| 62270 | 1949 | 25,303.34 | 12,651.67 | 1,639.59 |
| 53007 | 1950 | 13,390.70 | 6,695.35 | 636.81 |
| 62270 | 1951 | 78,092.22 | 39,046.11 | 4,902.72 |
The issues to be decided are: (1) Whether commission payments made by petitioner Frank J. Valetti to officers of ships which he supplied during the years in issue were deductible as ordinary and necessary business expenses; (2) whether the amounts of commissions claimed on his returns were, in fact, paid; (3) whether any part of the deficiencies for each of the years in issue was due to fraud with intent to evade tax; (4) whether the statute of limitation bars assessment and collection of deficiencies determined for the years 1948 and 1949; and (5) whether the respondent erred in imposing penalties under section 294 (d) (2) for substantial*156 underestimate of estimated tax for each of the years in issue. Other issues raised in the petition are deemed to be abandoned since petitioner did not offer any evidence with respect thereto and did not discuss such issues on brief.
FINDINGS OF FACT.
Frank J. Valetti (hereinafter referred to as the petitioner) and his wife, Sarah J. Valetti, were residents of Philadelphia, Pennsylvania, during the years in issue. They filed joint income tax returns for such years with the former collector of internal revenue at Philadelphia.
Since 1914, petitioner has been engaged in business as a ship chandler. In essence, the business is that of supplying ocean-going tramp steamers with operational supplies. From 1914 until 1921, petitioner worked in New York and Philadelphia for other chandlers; in 1921, he commenced his own business in Philadelphia. Petitioner employs five persons -- a bookkeeper, a truck driver, a warehouseman, and two runners or salesmen who go aboard the ships when they dock and attempt to sell supplies.
*694 When merchandise is sold by petitioner, an invoice or bill is submitted and must be signed by the officer who purchased the supplies. Receipted invoices are*157 then sent to the agent for the owners who makes payment to petitioner.
A universal custom existing, not only in the United States but throughout the world, is that chandlers, such as petitioner, pay a so-called commission to the officers of ships. Commissions usually average 5 per cent of the bill for the merchandise sold. In some instances a commission would amount to 7 1/2 or 10 per cent, and in an unusual situation would be as high as 15 per cent. The owners of the ships knew such commissions were being paid. A chandler could not remain in business if he failed to observe the custom and pay a commission to ships' officers.
Set forth below are the total sales made to ships as reported by petitioner on his returns; the commissions which he allegedly paid to ships' officers and which he claims are deductible as ordinary and necessary business expenses; and the per cent of sales which such amounts of commissions averaged during the years in issue:
| Year | Sales | Commissions | Average |
| percentage | |||
| 1948 | $ 466,260.35 | $ 75,446.00 | 16.18 |
| 1949 | 321,430.92 | 54,905.72 | 17.08 |
| 1950 | 245,744.11 | 33,984.35 | 13.83 |
| 1951 | 937,178.39 | 87,259.50 | 9.31 |
| 1,970,613.77 | 251,595.57 | 14.10 |
*158 The petitioner almost always made commission payments in cash. He drew checks of sizable sums on the firm's business account and later submitted vouchers to the firm which he always, personally, made out showing the date of payment, the name of the ship, the name of the officer, and the amount allegedly paid. Petitioner's bookkeeping system in 1948 did not correlate the vouchers with the checks which provided petitioner with the funds for the payments claimed on the vouchers. His system in the 3 latter years in issue enabled the bookkeeper to correlate the checks drawn and cashed for use in paying commissions with the vouchers showing such payments. The vouchers which the petitioner made out were never signed by the recipient of the commission. It was not customary for officers to sign for the receipt of commissions paid to them.
The respondent investigated petitioner's returns for the years 1945, 1946, and 1947, and determined substantial deficiencies. Such determination was settled by petitioner's payment of income tax deficiencies for such years in the respective amounts of $ 13,497.82, $ 8,809.91, $ 23,365.35, and by the payment of a fraud penalty for the year 1947 in the*159 amount of $ 11,682.68.
*695 In determining the deficiencies herein, the respondent disallowed the amounts claimed by petitioner as commission payments made to the officers of ships on the grounds that such payments were not ordinary and necessary expenses of his business, and in any event, had not been proved to have been made.
The petitioner made commission payments to officers of ships which he supplied during the years in issue of not more than the amounts set forth below:
| 1948 | $ 34,969.53 |
| 1949 | 24,107.32 |
| 1950 | 18,430.81 |
| 1951 | 70,288.38 |
A part of the deficiencies for each of the years in issue was due to fraud with intent to evade tax. The returns for 1948 and 1949 were false or fraudulent with intent to evade tax.
OPINION.
The first issue raised in this proceeding is whether commissions, in whatever amount, paid by petitioner to officers of ships which he supplied were deductible as ordinary and necessary business expenses within the meaning of section 23 (a) (1) (A). Petitioner established by an overwhelming preponderance of the evidence that the payment of such commissions is a universal practice in his business, not only in the United States but throughout the*160 world. The respondent has not argued that such payments contravene or frustrate any sharply defined national or State policy, and we are satisfied that the commissions paid to officers of ships, by chandlers who supply such ships, constitute an ordinary and necessary expense of their doing business. See Lilly v. Commissioner, 343 U.S. 90">343 U.S. 90 (1952); Rev. Rul. 54-27, 1954-1 C. B. 44.
In addition to determining that such commissions did not constitute an ordinary and necessary business expense, the respondent disallowed the amounts claimed by the petitioner here on the ground that petitioner failed to prove that such amounts had been paid. In support of his argument that the commissions which he claimed on his returns were, in fact, paid, petitioner submitted summaries of the amounts of commissions paid in each of the years in issue based on the original vouchers which he had made at the time such commissions were allegedly paid. The respondent did not object to the introduction of the summaries as reflecting the information contained on the vouchers, but argued at the hearing, as he does on brief, that the*161 vouchers themselves are not conclusive evidence that the payments which petitioner claims were actually made. He points out that the payments were made in cash, usually from the proceeds of *696 checks of substantial amounts, drawn from time to time on the company account, and turned over to the petitioner; and that the vouchers indicating a disbursement of such cash sums were made by petitioner in his own handwriting, and were not signed or receipted by the recipient of the payment. He therefore argues that because of the manner in which commission payments were handled, the petitioner could easily falsify vouchers, and by doing so withdraw substantial amounts of cash for his personal use under the guise that such amounts were commissions.
We think petitioner established that it was not customary in the trade for the recipients of commissions to sign a receipt for the amounts which they received; but, we agree with the respondent that the type of payments here involved and the manner in which they were made were easily open to flagrant abuse by a taxpayer bent on defrauding the Government. We appreciate, too, insofar as both a taxpayer whose records are challenged by the *162 Government is concerned, and insofar as the Government is concerned in trying to show whether or not payments were actually made, that the only way proof of such payments could be conclusively established would be by the testimony of the recipients of the payments. Obviously, in a case such as this where the recipients are scattered all over the world, that is highly impracticable for both parties.
During the course of the hearing, the petitioner called, as witnesses, two ship chandlers from Norfolk, Virginia, and a representative of a firm engaged in ship repair work in the Philadelphia area who also paid commissions to ships' officers on the cost of such work. The testimony which those individuals gave, as the result of the respondent's cross-examination, clearly established that the customary commission paid by all chandlers everywhere is 5 per cent of the total sales made to ships. One of the witnesses testified that, under certain circumstances, as much as 10 or possibly 15 per cent might be paid to a captain, but that so large a payment was the unusual rather than the usual amount. The petitioner, himself, introduced certain letters in evidence which also indicated that the*163 customary amount of a commission was 5 per cent. One such letter was from a chandler in Baltimore paying petitioner for merchandise delivered to a ship for its account, together with a payment for the commission given to the steward, which commission was less than 5 per cent of the bill for the merchandise. Another letter was from a shipowner, asking that petitioner refund the amount paid for a forge which had been returned, "discounting the 5% given by you to said Chief Engineer." Both of the aforementioned letters were written in 1949. Another letter, dated June 1, 1956, was addressed to petitioner from an Italian shipowner and referred to a proposed contract with petitioner to supply *697 its ships when they docked at Philadelphia. The owner asked if petitioner would grant discounts of "5% to be given to the crew (Cook or Chief Steward) on the amount of the invoice, at the moment of the supply" and "5% extra, in our favour." The amounts which petitioner claimed he paid out as commissions in 1948 and 1949 were over three times the customary rate; in 1950, they were over twice as much; and in 1951 almost twice as much. To have paid commissions averaging the percentage amounts*164 claimed, petitioner, in 1949, for example, would have had to pay all officers at least 17.08 per cent on the amount of merchandise which they purchased, or some much more, and some less. There is no evidence indicating that any single commission paid by a chandler ever exceeded 15 per cent of the bill.
We appreciate the possible margin of error in determining deficiencies on the basis of percentages which supposedly reflect either profits or expenses of a business. See Kurnick v. Commissioner, 232 F. 2d 678 (C. A. 6, 1956), affirming T. C. Memo. 1955-31. But the evidence here of the normal percentage amounts paid by chandlers, as commissions, convinces us that petitioner did not pay the large amounts which he claimed. And we note that petitioner offered us no explanation as to why his commission payments were far out of line with others in his trade. The sum of all this is that we do not believe that petitioner made commission payments in excess of 7 1/2 per cent of his gross sales and we, accordingly, so found.
The fraudulent intent of a taxpayer in filing his returns is a fact which the respondent must establish by*165 clear and convincing evidence. It may not be presumed; it may not be merely a suspicion; it must be shown. Seldom can a showing of fraudulent intent be made by direct evidence. We think the facts here, however, come close to such showing.
Petitioner was a man of ability and obviously attended to his business with the care necessary to achieve the success evidenced by the amounts of income which he reported. He failed, however, to exercise a similar degree of care in dealing with the Government and, we think, purposely failed to meet the minimum standard demanded of every taxpayer to deal honestly and fairly with it. We think the respondent established by clear and convincing evidence that petitioner deliberately understated his income during each of the years in issue with the calculated intent of evading his tax liabilities.
In finding that the petitioner did not pay commissions in excess of 7 1/2 per cent of his gross sales, we do not mean to suggest, as may often be true in cases of disputed expense payments, that the petitioner simply failed to prove that he made expenditures in excess of that amount. We think that the evidence here establishes that petitioner did not, in*166 fact, make payments anywhere near the amounts *698 claimed on his returns for any of the years in issue. As we mentioned before, he offered no explanation which would justify the large commissions which he claims to have paid. Because of the manner in which he operated his business, it must follow that he alone was responsible for claiming deductions for payments which he knew had not been made. He, personally, made cash withdrawals from the business; he, personally, made out vouchers showing payments of commissions which he knew had not been made; he gave those vouchers to his bookkeeper and to his accountant who prepared the returns on which the amounts were claimed as deductions; and he signed and filed each return for the years in issue, knowing that it was not a "true, correct, and complete return" of his income. We are satisfied that he did so with the deliberate intention of reducing the amount of his tax liability by false and fraudulent means.
Since the returns for 1948 and 1949 were false or fraudulent with intent to evade tax, the statute of limitation is not a bar to the assessment and collection of the deficiencies determined for those years.
The petitioners *167 offered no evidence establishing error in the respondent's determination of additions to tax for substantial underestimate of estimated tax, and such additions, where applicable upon a final computation of the deficiencies herein, are approved.
Decisions will be entered under Rule 50.